Despite Fee Headwinds, IOOF Remains Well Placed as Superannuation Assets Grow

We make minor downward changes to our forecasts and maintain our AUD 11 fair value estimate following narrow-moat IOOF’s fiscal 2016 result. Although profit met our expectations, up 1% to AUD 171.3 million, shares in IOOF fell by over 8% following the release of its results. We believe the market is growing increasingly pessimistic around the firm’s platform earnings, following a 6% decline in the division's profitability during the year. While we acknowledge headwinds from fee pressure, at the current share price, we believe IOOF is undervalued. The vertically integrated model and strong industry tailwinds of the Australian superannuation system should support growth in FUM and demand for advice. While stronger equity markets remain important, we anticipate a rerating in the share price, stemming from earnings results indicating that margin pressure in platforms is being more than offset by growth in funds under administration, or FUA; stronger inflows across all divisions; and no large client losses.